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Currency Market Analysis

Oct 31, 2019 | Currency Market Analysis

Global Themes

Nursing a post-Fed hangover, the greenback slid broadly with its biggest losses coming against the Japanese and British currencies. The euro and Canadian dollar steadied. Meanwhile, doubts resurfaced in the U.S. and China reaching an initial trade deal, pressuring stocks and emerging markets to the benefit of the yen. As expected, the Fed cut interest rates for a third straight meeting, lowering its key rate by 25 basis points to a range of 1.50% to 1.75%. But while the Fed signaled a lower likelihood of another rate cut by year-end, its cautious tone suggested the next move could still be a cut. While the Fed lifted the bar to an imminent rate cut, the bar is as perceived much higher for the central bank to consider a rate hike, given stubbornly low inflation. More event risks lurk with U.S. consumer spending and inflation today and tomorrow’s crucial October jobs report. 


Lackluster European data kept the euro from benefitting much from the greenback’s post-Fed swoon. Euro zone inflation took another wrong turn as prices slowed to a 0.7% annual rate, below forecasts of 0.8%, and moving further away from the ECB’s near 2% bullseye. Unemployment steadied at 7.5% in September, the lowest level since July 2008, but slightly higher than expected. Euro zone third quarter growth came in a 0.2%, a modest upside surprise. Today’s data still paint a dreary picture of growth which will reinforce the ECB’s easing bias. 


No chance of the U.K. crashing out of the EU on Halloween buoyed sterling which shot toward five-month peaks. The Brexit story has shifted from a boil to a simmer after the EU this week awarded the U.K. three more months to get its act together, while the market is giving coming elections the benefit of the doubt that they might prove to be the elusive solution to the years-long Brexit impasse. A weaker greenback helped sterling pad its gains. 


The dollar remained in the doldrums after tepid inflation data justified the Fed’s still open door to lower interest rates. The Fed’s main measure of inflation backslid from its 2% goal, softening to a 1.7% annual rate from 1.8% in August. Personal income and spending rose as expected which tempered worries about slowing growth squeezing the consumer. Next up: Friday’s jobs report which is forecast to show slower hiring below 100K but higher wage growth.


Canada’s dollar fell out of bed and surrendered three-month high after the Bank of Canada this week left interest rates unchanged but its cautious guidance potentially set the table for a rate cut in the months ahead. At 1.75%, Canada is now home to the developed world’s juiciest base rate thanks to America’s central bank lowering rates for the third time this year. The loonie’s weaker bias was also validated by underwhelming Canadian growth which rose 0.1% in August, slightly below forecast. 


Renewed trade uncertainty and the Fed not shutting the door to further rate cuts catapulted the yen higher. The Bank of Japan’s steady hand on policy overnight also buoyed the yen, a decision that was considered a close call whether to beef up stimulus. The BOJ did put markets on notice that it could ease policy over the near-term given threats to the world’s No. 3 economy from trade wars and slowing global growth. 

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